Economic Data: inflation in the US, as measured by the change in the Personal Consumption Expenditures (PCE) Price Index, edged higher to 2.3% on a yearly basis in October from 2.1% in September, the US Bureau of Economic Analysis (BEA) reported on Wednesday.

The core PCE Price Index, which omits the often fluctuating prices of food and energy, rose by 2.8% during the same period, up from 2.7% in September and matching analysts' expectations. On a monthly basis, the core PCE Price Index increased by 0.3%, as predicted.
 

Market Reaction to PCE Inflation Data

The US Dollar Index saw a slight recovery from its daily lows following the release of the data, though it still remains in negative territory. As of the time of this report, the index was down 0.55% for the day, standing at 106.30.

The United States Bureau of Economic Analysis (BEA) is scheduled to release the Personal Consumption Expenditures (PCE) Price Index data for October on Wednesday at 15:00 GMT. This index is the Federal Reserve's preferred gauge of inflation.

While PCE inflation data typically has a significant impact on the markets, its effect on the US Dollar (USD) valuation may be harder to gauge this time. With the Thanksgiving holiday approaching on Thursday, other key macroeconomic data—such as the weekly Initial Jobless Claims, October Durable Goods Orders, and the revised estimate of third-quarter Gross Domestic Product (GDP)—will also be released alongside the PCE figures.
 

Anticipating the PCE: Insights into the Federal Reserve's Key Inflation Metric

The core PCE Price Index, which excludes the often volatile prices of food and energy, is expected to increase by 0.3% month-over-month in October, consistent with September's rise. Over the past year, core PCE inflation is anticipated to climb to 2.8%, up from 2.7%. In contrast, the headline annual PCE inflation is projected to rise to 2.3% from 2.1% during the same timeframe.

At the November policy meeting, the Federal Reserve (Fed) opted to reduce the policy rate by 25 basis points (bps), bringing it to a range of 4.5%-4.75%. In its policy statement, the US central bank slightly adjusted its language, stating that inflation had "made progress" toward its target, compared to the previous statement's "made further progress." The Fed also noted that core PCE inflation has remained relatively stable over the last three months.

In previewing the upcoming PCE inflation report, TD Securities commented that headline PCE prices likely rose at a solid pace of 0.27% month-over-month, with core prices increasing by 0.31% month-over-month and supercore inflation accelerating to 0.39% month-over-month. Additionally, TD Securities noted expectations for consumer spending to start Q4 on a softer note, with a nominal rise of 0.3% month-over-month in October, close to flat in real terms.

The CME Group FedWatch Tool indicates that markets are currently assigning a nearly 41% probability to the Fed keeping the policy rate unchanged at the last meeting of the year. This suggests that the US Dollar faces a two-way risk as the event approaches.